We are an IT company and we would like to introduce employee loan agreement for our employees. What is the preferred interest rate as per latest act?
From India, Ahmedabad
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1From India, Ahmedabad
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Dear member,
In many companies, when a loan is given to the employees, they do not charge any interest. However, they just restrict the loan amount to one month's gross pay, and repayment is done in a maximum of 5 installments.
Few companies link the payment of installments to the length of service. The higher the length of service, the more the installments, with a maximum of ten.
Your primary query is on charging interest on the loan amount. However, it should be noted that if you give a loan with interest, the interest has to be lower than what banks or authorized financial institutions charge. If the interest is low, then only it can be considered a soft loan. However, it will also increase your administrative burden. Therefore, my recommendation is to advise employees to take a loan from the bank, and you may cover the interest part of the loan for the first few months. For this arrangement, you need to have an exclusive agreement. You may include a clause in the agreement that the company will bear the interest provided the employee has worked for at least 20 working days. Otherwise, the company will take responsibility for the payment of the interest for that month. If the employee separates, for any reason, the company will not pay the installment after the separation.
If you enter into the agreement as suggested above, the disbursed amount will become a taxable amount. Therefore, the portion of EMI has to be routed through the monthly payslip.
Lastly, about maintaining anonymity, if you wish to seek advice from seniors, courtesy demands disclosure of your name and designation. The kind of query that you have raised does not merit protection of identity. You could have been more mindful of this.
Thanks,
Dinesh Divekar
From India, Bangalore
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In many companies, when a loan is given to the employees, they do not charge any interest. However, they just restrict the loan amount to one month's gross pay, and repayment is done in a maximum of 5 installments.
Few companies link the payment of installments to the length of service. The higher the length of service, the more the installments, with a maximum of ten.
Your primary query is on charging interest on the loan amount. However, it should be noted that if you give a loan with interest, the interest has to be lower than what banks or authorized financial institutions charge. If the interest is low, then only it can be considered a soft loan. However, it will also increase your administrative burden. Therefore, my recommendation is to advise employees to take a loan from the bank, and you may cover the interest part of the loan for the first few months. For this arrangement, you need to have an exclusive agreement. You may include a clause in the agreement that the company will bear the interest provided the employee has worked for at least 20 working days. Otherwise, the company will take responsibility for the payment of the interest for that month. If the employee separates, for any reason, the company will not pay the installment after the separation.
If you enter into the agreement as suggested above, the disbursed amount will become a taxable amount. Therefore, the portion of EMI has to be routed through the monthly payslip.
Lastly, about maintaining anonymity, if you wish to seek advice from seniors, courtesy demands disclosure of your name and designation. The kind of query that you have raised does not merit protection of identity. You could have been more mindful of this.
Thanks,
Dinesh Divekar
From India, Bangalore
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To my knowledge, there is no legislation that covers interest rates for employees. You can check comparable organizations to benchmark.
With my fifty years of experience, I can tell that it varies from 0% to 12%. I never came across rates higher than 12% during my service, even when market rates were as high as 18% in the 1980s and 90s.
T. Sivasankaran
From India, Chennai
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With my fifty years of experience, I can tell that it varies from 0% to 12%. I never came across rates higher than 12% during my service, even when market rates were as high as 18% in the 1980s and 90s.
T. Sivasankaran
From India, Chennai
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To the best of my knowledge, the interest is charged as per the provisions laid down by the RBI. Furthermore, except for a financial institution approved by the RBI, no other institutional or individual is authorized to engage in the loan business. If an employer is providing a loan and charging interest, it is not only against the law but also unethical. On the other hand, the employer can provide advances to its employees according to the company's policy. The approval of advances is at the discretion of the employer; no one can compel the employee to accept an advance.
However, if the employer itself is a financial institution, it can offer loan facilities to its employees at a subsidized rate with approval from the RBI. In such a scenario, the employee will be considered a CUSTOMER!
Regarding the disclosure of identity: Please note that you are receiving free advice from knowledgeable professionals, a service that is typically charged for by freelancers. Therefore, not disclosing your identity may be perceived as impolite.
Thanks,
From India, Kolkata
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However, if the employer itself is a financial institution, it can offer loan facilities to its employees at a subsidized rate with approval from the RBI. In such a scenario, the employee will be considered a CUSTOMER!
Regarding the disclosure of identity: Please note that you are receiving free advice from knowledgeable professionals, a service that is typically charged for by freelancers. Therefore, not disclosing your identity may be perceived as impolite.
Thanks,
From India, Kolkata
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Employee agreement.doc
Loan Agreement.pdf